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Stocks for the “Long Run” and August 2020 – End of Month Update

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… It’s going to rain and it’s going to blow
But it’ll be all right, it’ll be all right, it’ll be all right in the long run …
Excerpt from the “Long Run” lyrics by Redgum (John Schuman) released in 1980.

Slack Investor looks at the shares that he owns occasionally and has a bit of a tinker. Earlier this year I had a portfolio review that saw a dumping of managed funds and high fee ETF’s. I also made an attempt to exit shares that I thought might be severely affected by gloomy economic times. However, sometimes it is good to lift the sights to the horizon and forget about the short term pricing of the market.

“Over the 210 years I have examined stock returns, the real return on a broadly diversified portfolio of stocks has averaged 6.6 percent per year.”
Jeremy J. Siegel, Stocks for the Long Run

Although the last financial year was a bit bleak for the median of super growth funds (-0.5%), Slack Investor has been around long enough to know that the gloomy times are periodic, and that, “In the Long Run” shares are a very good investment – as can be seen on the 28-year performance chart below.

This image has an empty alt attribute; its file name is 2020GrothFundsChart-4-MR-Jul20.png — *The Performance of the median Australian Superannuation Growth Fund over the past 28 years. A “Growth Fund” is defined to have between 60 – 80% of Growth Assets – From* Chant West

During my portfolio review I realised that over half my portfolio is in several companies that I would never sell – unless circumstances changed greatly! These companies usually have great management, a plan for growth, and an established track record in increasing Earnings per Share (EPS). Prices may go up and down, but great companies ride though all this and figure out a way to keep growing.

Coles (COL)

COL (2022 ROE 36%, 2022 PE 23) – With around 30% of all supermarket sales, Coles is one of the lucky retailers classified as essential and is getting a boost from COVID-19. This boost wont last forever, and, I cant see any big growth ahead. But, I can’t see myself selling this company as I visit it twice a week to “kick the tyres” and they are doing a good job. There is also the perverse satisfaction of knowing that if I am waiting at the checkout for a time … that it must be good for the bottom line!

Altium (ALU)

ALU (2022 ROE 32%, 2022 PE 56). The PE ratio of Altium has it priced for big future growth and it would be a stretch to buy it now. But this printed circuit board designer is a company for the times and it has a well defined, and so far achievable, global growth strategy.

Although relatively expensive (Forecast PE 56), Altium has no debt, a decent cash balance and keeps growing its profit margin and market share. In 2019, Altium spend 14% of its revenue on Research and Development – This is a commitment to growth in a changing industry.

Commonwealth Serum Laboratory (CSL)

CSL (2022 ROE 29%, 2022 PE 38) – Slack investor first bought into this company 10 years ago at around $30 and I have had the good fortune to add to my holding (at much higher prices!) along the way. CSL is expensive at a forecast PE of 38, but I can remember at my initial purchase in 2010, I thought it was expensive then! With great companies, sometimes you just have to hold your nose and jump in – they are rarely cheap! If it wasn’t already such a large part of my portfolio, Slack Investor would buy more CSL if I could get it below $300. The price chart below is reassuring.

Weekly chart of CSL over 5 years – From Incredible charts.com

Alphabet – (GOOGL)

(GOOGL – 2022 ROE 18%, 2022 PE 24). Alphabet is listed on the US-based NASDAQ exchange and needs an International Broker to invest directly (Commsec will set you up for a cost of 0.31% for trades above USD $10,000). For a growth company, Alphabet is not outrageously expensive with a forecast Price to Earnings Ratio of 24.

One of the first charts I look at before buying a stock is how its income has evolved – Thank you Market Screener. The GOOGL income chart below is typical of how I like to see them. A steady track record of 3 years growth of sales/income, and then a plan to grow income over the next 3 years.

Income and Forecast Income for Alphabet (GOOGL) – from marketscreener.com

A common theme amongst companies that I am reluctant to sell is their willingness to invest in new projects that might feed back into the earnings of the company. Alphabet spent a staggering US$ 16.2 Billion on research and development – 14.6 % of its revenue in 2018

BetaShares NASDAQ 100 ETF – (NDQ)

(NASDAQ Index – Current ROE 14%, Current PE 23) – Australian exposure to this index comes at a cost (MER of 0.48%) through the NDQ Betashares ETF, but Slack Investor thinks this is well worth it – my costs in owning GOOGL directly are around 0.43%. This ETF is Slack Investors favourite way to own International Tech stocks. With NDQ, you get exposure to 100 of the world’s best tech companies. The NASDAQ Index is a collection of growing household tech names e.g. Apple 13.9%, Microsoft 11.2%, Amazon 10.9%, Alphabet 7.2%, Facebook 4.5%. With a forecast PE of around 23, it still looks reasonably priced if tech world keeps growing.

August 2020 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. Rises all round for Slack Investor followed overseas markets this month ( ASX 200 +2.2%; FTSE 100 +1.1%) In Crazy Brave USA, the S&P 500 had a monthly rise of an astonishing 7.0%.

At the end of August, the US S&P 500 had a 12-month trailing PE Ratio of 30.09 . The mean and median values are 15.81 and 14.83.

In the real world, the US economy entered a recession in February 2020 and Slack Investor has his stop losses live for all Index funds.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Financial Year 2020 Slack Results

“If you can follow only one bit of data, follow the earnings — assuming the company in question has earnings. … What the stock price does today, tomorrow, or next week is only a distraction.”
Peter Lynch, One Up On Wall Street:

The great investor Peter Lynch had plenty of “solid gold” insights that Slack Investor has tried to incorporate into his investing. I have long extolled the virtues of growing companies with high Return on Equity (ROE). But, before I invest, I look at the earnings and projected earnings of each company at an aggregate site such as the most excellent Market Screener – Registration is free!

For example, the current market darling Afterpay (APT) is an excellent business idea and has performed extremely well for those who own it (Up 163% FY2020). APT may be a very successful company – but it is not expected to have positive earnings till 2022. From the earnings table below, both Slack Investor and Peter Lynch would be reluctant to stump up $66 to earn $0.28 in 2022.

June FY
EPS

2017
–

2018
-$0.04

2019
-$0.18

2020
-$0.16

2021
-$0.01

2022
$0.28

Annual Earnings per Share (EPS) for ASX listed Afterpay (APT) from MarketScreener

Slack Investor tries to get things “mostly right” and fills his portfolio with companies that Peter Lynch would hopefully approve of – There are no Afterpay’s, but many other growing companies that have an established earnings record – There will probably be some temporary downgrades to earnings in the Slack Portfolio this year due to the virus. I could never match Peter Lynch’s legendary performance, where he grew his Magellan Investment Fund from 1977 until 1990, at an average 29.2% annual return – roughly twice the gains of the S&P 500 at the time.

Things were going along swimmingly for FY 2020 till mid-February and the rapid spread of COVID 19 around the world. For FY 2020, the worst performing followed index was the UK, with the FTSE 100 Total Return Index down 13.8%. Dividends helped the Australian Accumulation Index to be down 3.7% for the financial year. These Americans really believe in their stock’s ability to keep earning during this recession (maybe Slack Investor has a twinge of doubt here) … the S&P 500 Total Return Index was UP 12.0% for the same period. All of these Total Return Indexes include any accumulated dividends, wheras the chart below of the ASX 200, just shows stock prices.

ASX 2oo Weekly chart for FY 2020 – started at 6618 and finished at 5897 (30 June 2019 – 30 June 2020) – Incredible Charts

Slack Portfolio Results FY 2020

Slack Investor has three financial pillars to keep himself steady. I will expand on these in a later post.

House – Home ownership gives me great security and pleasure. The bank owned most of this 30 years ago – but now I have the upper hand! (~30% of Net Worth)
Income – This used to be my job, but in retirement I have some stable income annuity style investment (~20% of Net Worth) that would pay my bills and maintain a basic Slack Lifestyle should Armageddon befall the stock markets for a few years. This income is supplemented by income from the Slack Portfolio.
Slack Portfolio Investments – (~50% of Net Worth) – Now currently in my Self Managed Super fund (SMSF) which is almost exclusively invested in growth companies. These are great businesses to be invested in if you have a long time horizon – as stock prices can be volatile in high Return on Equity (ROE) shares. I am currently retired and would not rely on the Slack Portfolio for stable income. Because of the stability of my other two pillars, I can be quite aggressive in the allocation of my investments in the Slack Portfolio – as I know I will not have to panic sell (for income) during any downturn.

All Performance results are before tax, given the circumstances, the Slack Portfolio annual FY 2020 performance of +9.4% was a pretty good result. Full yearly results with benchmarks are shown in the table below. A mediocre year for all benchmarks exposed to Australian and UK share markets (Median Balance Fund +0.3%, Vanguard Growth Fund +0.6%, ASX 200 Accumulation -2.7%). Real Estate was a good investment in the Brisbane and Melbourne markets for FY 2020 (+8.4% and +13.8%) – but the winds for these investments are blowing the wrong way now.

YEAR	SLACK FUND	MEDIAN BAL	VGARD GROWTH	ASX200Acc	RES BRIS	RES MELB	CASH	CPI
2010	6.6	9.8	12.3	13.1	10.8	26.9	4.2	3.1
2011	2.5	8.7	9.1	11.7	-2.4	0.9	4.4	3.7
2012	8.3	0.4	1.3	-6.7	1.3	-0.9	4.3	1.2
2013	26.5	14.7	18.6	22.8	7.7	8.3	3.2	2.4
2014	23.6	12.7	14.5	17.4	11.5	12.8	2.6	3.0
2015	2.4	9.6	11.8	5.7	7.7	15.6	2.5	1.5
2016	14.2	2.8	4.2	0.6	8.4	9.5	2.2	1.3
2017	19.5	10.4	8.8	14.1	6.5	17.7	1.9	1.9
2018	37.6	9.2	10.0	13.0	1.1	5.2	3.9	2.1
2019	19.7	7.2	9.8	11.2	1.7	-6.0	2.0	1.3
2020	9.4	0.3	0.6	-2.7	8.4	13.8	1.1	-0.3

The Slack Fund yearly progress vs BENCHMARKS. The Median Balanced Fund (41-60% Growth Assets), Vanguard Growth Fund, ASX 200 Accumulation Index, Corelogic Residential Property total return in both Brisbane and Melbourne, and Cash (Australian Super Cash Fund) and Consumer Price Index (CPI)

The Five-year compound annual performance gives me a much better idea about how things are going and will smooth out any dud (or remarkable!) results.

The beauty of compounding with a succession of good performance results can be seen in the chart below showing the growth of an initial investment in June 2009 of $10000.

FY 2021 Resolutions

Image from the perceptive Gary Markstein.

The delusional President Trump provides many lessons to Slack Investor. The absence of these traits in Trump reminds me that humility and compassion are such worthwhile qualities. I will continue to work on these personal attributes this coming financial year and always be grateful for good fortune. I made plenty of mistakes this year and in hindsight sold some shares just before a decent price rise (e.g, IRI, CIP, VGE) – but Slack Investor accepts this as just the “normal path” of investing.

Slack Investor has no form in trying to predict the future … In the last 6 months I have tinkered with the Slack Portfolio and tried to get rid of any companies that would suffer severe setbacks in this COVID-19 led global recession. I have no great faith in my ability to time the exit and entry of exposure to sharemarkets, and I remain fully invested. Slack Investor is prepared to “ride this one out” with cash in the Portfolio at less than 1%.

In the wise words of Peter Lynch …

“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.”
Peter Lynch, One Up On Wall Street:

FY2020 Nuggets and Stinkers and July 2020 – End of Month Update

“Just get things mostly right“
Slack Investor 2020 –

Not that I think Slack Investor is worth quoting – but I searched high and low for a quote that expressed the Slack aim. The great Warren Buffet got closest to the sentiment with “You only have to do a very few things right in your life so long as you don’t do too many things wrong.” – but I used this quote last year!

It is good for me to have a yearly display of my failures. It reminds me of the bumbling path of Slack Investor in the pursuit of financial independence. As for the nuggets, just get the foundations right … and luck might intervene.

“You can never be a first class human being, until you have learnt to have some regard for human frailty.”
Abhijit Naskar, Conscience over Nonsense

The percentage yearly returns quoted in this post include costs (brokerage) but are before tax. This raw figure can then be compared with other investment returns.

Slack Investor Stinkers – FY 2020

The Slack Investor Portfolio comprises of (mostly) high Return on Equity (ROE>15%) and high Price to Earnings (PE) ratio stocks. Historically, these companies are quite volatile as they are priced to account for future growth. If there is an earnings revision … or a change that would affect future earnings, then the price of the share usually plummets. Slack investor accepts that stinkers are just part of life when dealing with growth stocks.

Slack Investor has a look at his stocks on a chart (Thanks Incredible Charts!) every weekend – and, I eventually get the message if a stock price is moving lower and take the exit.

Rhipe (RHP) -22%

After being a star performer last year … this software technology company took a dive in share price this time last year. Slack investor bailed out in February 2020 – but not before taking a few licks.

Treasury Wine Estate (TWE) -13%

In Wine is Truth .. and this became evident at the start of this year as the global wine oversupply made it difficult for Treasury to raise prices. Their attempts to break into the US market were floundering and the stock price took a tumble. Slack investor “cleared the decks” in February 2020.

Centuria Industrial REIT (CIP) -11%

Centuria invests in industrial properties and was a victim of my COVID-19 portfolio trim. I sold out in April 2020 on my fears that the virus would affect tenancies. It seems that I took flight a little early as the stock price has rebounded 17% since I sold – Ah well … that’s investing!

Costa Group (CGC) -11%

Costa is agricultural company that grows and distributes mushrooms, berries, tomatoes, citrus, avocados and heaps more. My involvement with this company unfortunately coincided with a 2-year price slide due to a series of farming misfortunes. I parted ways with Costa in October 2019. Slack Investor held this stock for far too long. However, owning this stock taught me a lesson – avoid business that are “price takers” – where the cost of goods is set by seasonal factors or competitors. The best businesses have an exclusive product that people want and there are barriers to entry for other competitors.

Slack Investor Gold Nuggets – FY 2020

The other side of investing in companies that have a high Return on Equity, and with a track record of increasing earnings, is that you can sometimes expose yourself to some pleasant surprises. The Return on Equity (ROE) and forward Price Earnings (PE) ratio values quoted below are “forward looking” and are analyst predictions for the year 2022. They were extracted from the excellent Market Screener site. These ratios are just predictions, but Slack Investor finds them very useful.

Appen (APX) +58%

APX (2022 ROE 19%, 2022 PE 32) remains a company that I don’t really understand but after taking profits and selling last year, I bought back in during November 2019 after a price fall and then a breakout from a “falling wedge”. Another excellent year for this machine learning and artificial intelligence company – Ignorance can be bliss!

Commonwealth Serum Laboratory (CSL) +31%

CSL (2022 ROE 31%, 2022 PE 32) is now the largest company on the ASX. Their blood products and expertise in gene therapy and vaccinations are used worldwide and there are projected increasing sales. Driving this fabulous company is a commitment to innovation. Spending on Research and Development is in the target range of 10 to 11 per cent of turnover – in an environment where a typical manufacturer will spend 2%. It is no coincidence that this company is doing well.

Alphabet (GOOGL) +30%

The Alphabet list of products is large … and getting larger. Everyday I use Google, GoogleMaps, gmail, android devices and YouTube. Alphabet (GOOGL – 2022 ROE 19%, 2022 PE 32) has just announced a quarterly rise in profits of 22% as it moves deeper into peoples lives. Alphabet and the other FAANG Stocks have been acting a bit like pirates in the multinational tax world. There are some regulatory risks on the horizon though. Nations are rightfully demanding a share of these tech giants revenue as taxation. There is also a bit of “pushback” by governments and media companies who want a fair share of revenue generated by their content. However, on the plus side, profits should continue to grow as advertisers are spending more to reach an expanding number of customers that are engrossed with their smartphones and YouTube.

A2 Milk (A2M) +26%

A2M (2022 ROE 28%, 2022 PE 29) sells A2 protein type branded milk, infant formula and other related products to the world. The actual benefits of the A2 only protein have been indicated in small studies but longer-term studies with larger sample sizes are needed. However, in the mean time, sales are increasing and the share price is still going north.

Honourable mentions for Slack Investor Portfolio stocks BetaShares NASDAQ Index NDQ, Integral Diagnostics IDX and BetaShares RBTZ that increased more than 15% in this financial year.

Slack Investor Total SMSF performance – FY 2020 and July 2020 end of Month Update

A tough financial year for shares through the COVID-19 financial crisis. Chant West reports the median of “growth” super funds struggled to a small loss of 0.5%. The FY 2020 Slack Investor preliminary total SMSF performance looks like coming in around 9%. The 5-yr performance is a more useful benchmark to me. At the end of FY 2020, the Slack Portfolio has a compounding annual 5-yr return of over 19%.

My wise mother used to say to me that “Self praise is no recommendation” So Slack Investor will meekly slink back to the couch and get prepared for what might be a tough time ahead in the share market. The full FY 2020 results and benchmarks will be expanded on next post.

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. A mixed bag for Slack Investor followed overseas markets this month ( ASX 200 +0.5%; FTSE100 -4.4%; S&P500 +5.5%).

The US S&P 500 has shown more resistance to gravity than the Trump hairstyle – but all parties must end some time. As the S&P 500 has moved more than 20% higher than its stop loss, I have adjusted the stop loss to 2965 from 2721.

The US economy entered a recession in February 2020 and Slack Investor has his stop losses live for all Index funds.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

HACK

Cripes … it seems that even cyber criminals with circuit board faces wear hoodies!

Slack Investor has had minor issues with PC viral infections over the years – these types of virus seem very benign in current circumstances. I also had a distant brush with a more organized form of cyber hacking back in 2015 with my previous employer.

“I can confirm reports that the Bureau of Meteorology suffered a significant cyber intrusion which was first discovered early last year”
Prime Minister Malcolm Turnbull in 2016 – the ABC News

Were the Chinese after my 30 years of sea breeze wind data? Probably not. This breach triggered an injection of government funds to try and combat cyber attacks. More recently, the current Australian government is talking about a huge $1.35 billion investment to increase Australia’s cyber security capabilities, Even smaller businesses are having to invest in cyber security as technology invades our lives.

As well as worrying about cybersecurity, the COVID-19 crisis lurches on. It is not just the retailers that are suffering, In the US, major companies such as Hertz and several US airlines have recently filed for bankruptcy due to COVID-19. At the moment, many companies are drawing down on available credit, standing down their staff, delaying projects and taking advantage of government relief programs.

It will be a delicate dance by national governments trying to support the economy with limited funds until a viable vaccine is established. When they halt these stimulus programs, each company will start burning through their cash. That’s when bankruptcy cases are likely to soar and stay elevated.

… this year (2020) will easily set a record for so-called mega bankruptcies — filings by companies with $1 billion or more in debt … the number of merely large bankruptcies — at least $100 million — to challenge the record set the year after the 2008 economic crisis.
Edward I. Altman, Professor Emeritus of Finance at New York University’s Stern School of Business – from Intelligencer

A Graph of US stocks showing valuation trend since 1998. Valuations derived from P/E ratios and comparing them to the long term mean and scaling it to 50. Companies in the US look definity over valued. Sourced from Livewiremarkets.

Slack Investor has been a big fan of some of the companies in the technology sector – as these shares are exposed to growth. This internet thing keeps increasing its grip on our lives. The recent “recovery rally” has led to stock prices being “fully” or “over valued” – particularly in the US. It is difficult to argue against this in these uncertain times as estimates for future US earnings decrease.

In an environment when many sections of the economy are in big trouble, in many ways, it might be a good time to take a bit of risk off the table and build up a little cash. However, not all tech companies are tied to the consumer economy and there will be a continuing need for individual companies and governments to make investments for the protection of their internet structures. Cyber security is now the fastest growing technology sector.

BetaShares Global Cybersecurity ETF (HACK)

HACK is a BetaShares ETF that provides exposure to the leading companies in the global cybersecurity sector. Most of these companies are based in the US (87%). HACK is currently invested in 49 companies that include well known names such as Broadcom and Cisco. There are many other companies that Slack Investor has never heard of such as Crowdstrike, Splunk and OKTA – and, I assume the fund managers know much more about the sector than I do.

Weekly chart of HACK for the past 12 months. On June 30, 2020 there was a 91c distribution which accounts for the big price drop – incrediblecharts.com

The management expense ratio is high at 0.67%. I will “suck this up” while it is performing well. Can’t argue with past yearly HACK performance – over 1-year (+19.9%) and 3-years (+20.3%). Probably not the best time to buy, but Slack Investor can’t help himself – this must be close to a recession-proof section of the economy. I dived in last month as I can’t resist a growing industry!

My House … and June 2020 End of Month Update

… Welcome to my house, Baby take control now, We can’t even slow down, We don’t like to go out, Welcome to my house …
Flo Rida “My House”

Slack Investor’s taste may not be quite as “gangsta” as Flo Rida – check out his full video to get a flavour of what I mean – But, both Flo Rida and I share a genuine passion for the joys of household ownership.

In my last post, I had a bit of a rant about the exorbitant transaction costs of buying a house. Despite the costs, I hope that I didn’t mislead about the absolute joy that Slack Investor feels about house ownership. A Slack Investor pillar for financial independence is to own your own place before you retire – as the cost of housing keeps rising for retired renters. The typical homeowner aged over 65 spends just 5% of their income on housing, this compares to nearly 30% for renters.

Flo Rida and I are enamoured with owning our surroundings:

The Serenity – Ownership gives stability and control – You can do what you like in your own house and are immune from sudden evictions.
Access to aged pension and taxation benefits – the home is treated differently than other assets. However, Slack Investor thinks that these concessions are too generous and will probably be capped in the future – Currently in Australia, $6 billion in pension payments go to people with homes worth more than $1 million.
Flexibility – No need to ask the landlord to make changes – If you go on an extended adventure, then why not rent your house out for the dates that you are away – to help pay for the holiday – Or, House swap to an exotic location!

Slack Investor understands that owning a home may seem an impossible dream to some – and, sadly, ownership rates are decreasing . But do not give up hope – Many real estate pundits are expecting prices to fall from their current eye-watering levels. This fall should be accelerated by COVID-19 factors.

Home Ownership rates are on the decline for all age groups. – Grattan Institute

A home does not have to be large and, it could be out of a capital city. There seems to be a trend already for millennials (and older folk 60-69) to be moving from cities to the regions according to the Regional Australia Institute. They suggest that equitable access to housing is one of the pull factors for this move to the regions. Slack Investor has spent most of his working career outside of big cities and can highly recommend the simplicity of life away from the capitals.

More than 400,000 Australians moved from capital cities to regional destinations between 2011 and 2016
Regional Australia Institute report – February 2019

June 2020 – End of Month Update

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Slack Investor admits to being only an amateur economist and finds the current situation in the US confusing – Stock market up, economy down! These are wild times … but I am back to all IN for my Index funds!

US Data keepers, the National Bureau of Economic Research (NBER) have now determined that the US economy entered a recession in February 2020 “with different characteristics and dynamics than prior recessions”. The Federal Reserve bank of Cleveland strangely have their forecast of a recession in the next year at 19.2% (below Slack Investors threshold of 20%). However, reality always beats forecasts and Slack Investor has his stop losses live again for all Index funds.

Monthly rises in all followed markets ASX200 +2.5%, FTSE100 +1.5% and S&P500 +1.8%.

COVID-19 problems go up … stock markets go up? I know stock markets are usually forward thinking and obviously see an end to COVID problems soon. Slack Investor is not so sure … but the charts have him invested in all markets. My portfolio is trimmed to industries that should be OK( I Hope?)

All Index pages and charts have been updated to reflect the monthly changes – ASX Index, UK Index, US Index. The quarterly updates to the Slack Portfolio have also been recalculated.

Call My Broker

It is my sincere hope that, when you call your broker, Jordan Belfort (played by Leonardo DiCaprio) from the highly entertaining Wolf of Wall Street, is not at the end of the line – Image may be subject to copyright.

Most people own shares indirectly through their superannuation or, perhaps through investment platforms such as Raiz – this is a good place to start. Slack Investor would like to make the case for moving onto the next investment step and getting a broker for yourself. These days, a broker is usually an online platform that organizes buy and sell orders for shares and other financial bits.

It brings me shame … but Slack Investor doesn’t just have just one broker … I have three! This might seem a tad excessive – most people only need one and I thought I might share my experience with all of them to help you choose the right one for yourself. If you are serious about investing, you need a broker- Even Dilbert has a broker!

*With acknowledgment to Scott Adams – whose everyman Dilbert brings joy to the tedium of the office.*

Getting a broker involves as much effort as getting a bank account – an associated trading account is usually required to store your cash when setting up. Most of this can be done online but there are a few identity checks to go through. I have set out below my experiences with my brokers – this is not a complete comparison and a good overview of recent offerings can be found at Best Online Brokers Australia for 2020. This field is rapidly changing with a move towards “zero brokerage” by some new players e.g. etoro. It is always a good idea to research the total costs for each of the new offers as there are often hidden fees such as “withdrawal fee”, “holding fee”, “inactivity fee “, etc. My experiences below might give you an idea on what to look for in your broker.

Commsec

Commsec was my first broker and it is the “gorilla” – It is Australia’s largest retail share trading platform and backed by the Commonwealth Bank. I use Commsec for my super fund trades.

Good things: A great trading platform with easy access to recent sales, buy/sell spread and research. One of the best thing about Commsec is that you can make a trade with zero money in your trading account and have 2 days before trade settlement to transfer your funds to your trading account. I have often sold a share and on the same day bought another share with the funds required covered by the previous sale – this gives great flexibility. Other than brokerage, there are no other fees for ASX shares.

Things that annoy me: The brokerage, this is on a sliding scale and range from $10 for a $1000 trade (1.0%) through to $19.95 for a $10000 trade (0.20%). Because most of Slack Investor’s trades are over $10000, I was pleasantly surprised to find that for the last financial year, my total Commsec costs were only 0.13% of trade value.

SelfWealth

SelfWealth is a much smaller trading house and has won Money Magazine’s “Cheapest Online Broker” award for the last three years. I use this for my own name accounts and was drawn in by their headline fixed price trades of $9.50 – no other fees.

Good things: A very cheap trading rate – my costs for 6 trades in the last 12 months amounted to 0.08% of trade value.

Things that annoy me: The SelfWealth trading platform is not as good as Commsec’s and transfers to and from the trading account are terribly slow. This is annoying as they don’t allow trades till there is money in the trading account. So, before I act on a trade I must first move money into the SelfWealth trading account – this may be days after I first see a trading opportunity!

Saxo Markets

Saxo Markets is a broker that I have only recently signed up with as my SMSF manager (esuperfund) required me to go through Saxo if I wanted to own overseas shares. Total costs will depend on how much you trade … but after the smooth Australian experience, the cheap trading fee is complicated by Currency Exchange fees, Inactivity fees and Holding fees. For the past year, my costs add up to 0.42% of trades.

Good things: The ability to buy other international stocks. Many other brokers also offer this.

Things that annoy me: The fees of course … and the confusing trading platform. I wouldn’t use these jokers if I had a choice. Particularly when there are cheaper ways to access the US market.- Stake has a similar currency conversion fee to Saxo without the multitude of other costs.

Stock broking expenses compared to Real Estate

Slack Investor stock broker transaction fees range between 0.08% and 0.42% of trade value – and I’m leaning towards Commsec as my favourite broker on a costs vs features basis. If I was just starting out, maybe SelfWealth, or one of the zero brokerage platforms – but watch out for other fees!

I might have had a little whinge about broker fees … but let’s just have a reality check with another common investment commodity where there are costs involved – Real Estate.

I have recently bought and sold a house and the transfer costs are relatively staggering.

When selling a house (Agent Fees, Conveyancing Fees, Advertising, Govt fees,etc), my transaction costs were 2.7%. When buying a house in Victoria, excluding loan costs, (Stamp duty, Land Titles, Conveyancing) the costs worked out to 5.8% of the purchase price.

Transaction costs are just part of investing, but it is no wonder that Slack Investor is attracted to the lower fees, simplicity and transparency of share trading over property trading. However, the volatility of shares I find testing at times.

Is it safe to come out now … and May 2020 End of Month Update

Viktor Bulla’s photograph of the “Pioneers of Leningrad” in a defense drill, 1937, showing the well equipped youth ready for anything … taken 4 years before the horrific Siege of Leningrad– From rarehistoricalphotos.com

This striking image of Leningrad children in their gasmasks has left a haunting impression on Slack Investor. The 900-day siege of the Russian city during WW2 claimed the lives of 800000 civilians – Many of the photographed children would have been involved.

Not trying to draw any parallels, but it is true to say that we are all a bit apprehensive about how to deal with this new post-lockdown world in Australia.

The number of fatalities for COVID-19 is still shocking and it is causing great hardship in many lives. In perspective though, the “big Daddy” virus is the 1918 Influenza where nearly a 1/3 of the world’s population was infected and global deaths amounted to almost 50 million people.

Given sufficient leadership (are you listening Donald and Boris!) the world will eventually see this COVID-19 off – like it has with all previous past viral outbreaks.

Slack Investor does have a furrowed brow about the whole world economy thing. Even bevore COVID-19, China’s economy was shrinking – and has now tanked.

Although China is expected to recover later this year, things don’t seem so good for the moment. The International Monetary Fund (IMF) are describing it as the worst economic downturn since the Great Depression. It is tough to provide forecasts for this event and, as a retired meteorologist, I feel for my economy forecasting brothers and sisters. They predict both advanced and developing economies are expected to show signs of life in 2021.

World economic growth projections by the International Monetary Fund (IMF) World Economic Outlook April 2020

No country is spared in this global crisis, in particular, nations with weak health systems, and more limited funds to provide support will struggle.

Slack Investor will leave the big world predictions to others and continue tinkering in a small way with his portfolio. What is obvious is that companies reliant on tourism, travel, hospitality, and entertainment for their growth are in big trouble. Emerging market and developing economies face additional challenges as they will find it harder to find investors to fund their projects in this climate.

This is not advice, but I will sell off my shares in emerging market ETF VGE and the Malaysian property trust UOS and buy some ETF’s such as NDQ or QLTY. I have had second thoughts about selling down my overweight position on CSL . This company continues to grow – and I just love owning it. – I would have topped up my holding this week as it is currently slipping in price to below $280 – but it is already a big chunk of my Portfolio.

May 2020 – End of Month Update

Governments around the world have been mostly doing their job responsibly and adding stimulus to the world economies in these troubled times. In response to this, the Federal Reserve bank of Cleveland have stabilized the probability of a US recession within the next year at 19.4% (below Slack Investors threshold of 20% – so stop losses on index stocks are in hibernation). There has been some real optimism in the markets with further big monthly rises in all followed markets ASX200 +4.2%, FTSE100 +5.4% and S&P500 +7.6%.

The rise in the ASX200 has Slack Investor back into the market with a weekly change in momentum of the weekly charts signaling a BUY. It’s all a little bit crazy … but I am back to all IN! The 11-Period Directional Movement Index (ADX) change of greater than 0.6 is used as the momentum indicator for entry with the complexities of this process explained on the Resources page.

Weekly chart of the ASX200 Index showing the weekly price ranges and the three lines of the directional movement system for momentum trades below – incrediblecharts.com

All Index pages and charts have been updated to reflect the monthly changes – ASX Index, UK Index, US Index.

Hail to the Geeks

In honour of the upcoming International Geek Pride Day to be celebrated on 25 May.

Being a geek is cool (Just ask Bill Gates!). They have rights … the top 5 rights of a Geek are:

1. The right to be even geekier.

2. The right to not leave your house.

3. The right to not like football or any other sport.

4. The right to associate with other nerds.

5. The right to have few friends (or none at all).

During the past month. Slack Investor has certainly lived the geek lifestyle and he has reflected on the magnificent gift that geeks gave to the world – technology!

The NASDAQ (National Association of Securities Dealers Automated Quotations) is a special US based electronic stock exchange that was created in 1971 and now lists over 3500, mostly tech, companies. The top 15 companies in the NASDAQ consist of the household names below.

Name	Weight (%)
MICROSOFT CORP	12%
APPLE INC	12%
AMAZON.COM INC	10%
FACEBOOK INC	4%
ALPHABET INC	4%
ALPHABET INC	4%
INTEL CORP	3%
NETFLIX INC	2%
NVIDIA CORP	2%
PEPSICO INC	2%
CISCO SYSTEMS INC	2%
ADOBE INC	2%
PAYPAL HOLDINGS INC	2%
COMCAST CORP	2%
TESLA INC	2%

The growth of the NASDAQ composite index since 1971 – Shown on a log scale – From Macrotrends

Despite a few downturns, mostly in recessions (shaded grey columns above), being invested in technology has really delivered. Betashares, an Australian company, offers simple exposure to the top 100 companies in the NASDAQ through NDQ, their Australian listed NASDAQ ETF. Slack Investor owns some US Listed shares directly and the hassle of different currencies, maintaining a US Broking account, and filling out US taxation forms make the NDQ ETF Management Expense Ratio (MER) of 0.48% seem reasonable. Morningstar also offers a Global technology ETF TECH. Good global technology access for a 0.45% management fee.

Weekly chart of Australian listed Betashares NDQ – Incredible Charts

The use of technology to connect people and develop new businesses has been well demonstrated during the COVID-19 crisis – these tech businesses are growing. Slack Investor has a big amount of technology stocks – over 35% of his Portfolio. NDQ has grown over 50% in the 18 months since the original Slack Investor buy.

One of the things that Slack Investor has learned over the decades is that a high PE is OK, providing that there is a lot of growth involved. Stamped on the little Slack Investor brain is that technology is becoming increasingly important in our lives – this sector is definitely growing.

The NASDAQ index usually has a relatively high average PE Ratio – but as of May 13 2020 it has slipped down to a very reasonable 20.55. There is also a decent trailing dividend yield of 1.73% – the dividend is showing an increasing trend.

This is not advice, as Slack Investor has no divine guidance on what will happen in the next 12 months. – but, with a 2-3 year time frame, will Slack Investor invest more into NDQ or TECH as funds become available? You bet your geekin’ life he will!

April 2020 – End of Month Update … The Real Cost of Early Super withdrawl

In relaxed lock down through the courtesy of COVID-19. But the stockmarkets never sleep.

The Federal Reserve bank of Cleveland have the probability of a US recession within the next year at 20.0% but there has been some optimism in the markets that there might be an eventual end to this wicked virus crisis. Rises in all followed markets ASX200 +8.8%, FTSE100 +4.0% and S&P500 +12.7%.

The rises in the UK and US have got Slack Investor back into the market with a change in momentum on the weekly charts signaling a re-entry. But it is with much trepidation – the rapid recovery seems to have been priced in a bit early!

Slack Investor has outlined in many posts about how to get out of trades with stop losses. But has been a bit lacking in detail on when to get back IN. When trend trading, my main tool for finding a buy signal is a trend following (or momentum) system called the Directional Movement Index. There are many ways of setting up this system. Slack Investor likes the “smoothing” that is enabled by a system that looks back over the previous 11 periods – but the complexities are best left for the Resources page.

UK Index weekly chart showing the weekly price ranges at the top and Average Directional Movement Index (ADX) patterns below – From Incredible Charts

I am quite comfortable with the re-entry into the UK Index shown above, but the rapid swings for the US charts have the Slack method back IN, but so far, performing worse than the “buy and hold” method. I will continue this index market timing experiment for another 4 years (to make it a 20-year trial).

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index).

Super Withdrawal … should you?

“A Run On the bank” an etching from the 1930’s – from sutori.com

The Australian Government has gone into real governing mode and set up some measures to help people get through this COVID -19 crisis. They have established “JobKeeper” payments ($1500 per fortnight), doubled “JobSeeker” payments (up to $1100 per fortnight), and allowed the unemployed and people whose hours have been cut by 20 per cent to access up to $20000 of their super early. There are some rules.

Slack Investor understands that times are tough for the many who have lost their jobs, but is disturbed that 881,600 people had registered with the government for early superannuation access – and this could blow out to 1.5 million people. Unfortunately (particularly if you have credit card debt), this will be a necessary step for some. Slack investor implores those affected to exhaust all other options first – an early superannuation withdrawal does have repercussions further down the track.

Comparing potential withdrawal impacts at different ages

Investor’s current age	Years to retirement	Value of $10,000 at retirement	Value of $20,000 at retirement
67	0	$10,000	$20,000
57	10	$17,908	$35,817
47	20	$32,071	$64,143
37	30	$57,435	$114,870
27	40	$102,857	$205,714

Source: Vanguard calculations – These calculations show a significant projected eventual cost of super withdrawal. However, these raw figures do not allow for inflation. A projection allowing for inflation (2%) using the smartasset inflation calculator shows that the $10 000 withdrawal after 40 years will grow to a still significant $46578 in 2020 dollars ($102857 in 2060 dollars).

Slack Investor knows that accessing cash like this has consequences and that people should make an informed choice between their short term financial need and their long term financial position.

There is also the effect on your insurance with the withdrawal of super … if you go to a zero balance, your super-related death and disability insurance will cease. Even if you return to work, it will not automatically reinstated until your account balance reaches $6000.

A real-life example from the Slack Investor chronicles. A long long time ago in 1982, a 25-year old Slack Investor wanted to travel overseas for the first time. Funds were a bit short and he had saved some money … but not enough for a whole year travelling. I had a superannuation balance of $3500 (This would be worth almost $10000 in 2020 dollars using the smartasset inflation calculator).

Back in those days, prior to compulsory super, you were allowed to cash your super in – and I stupidly did. To save up this kind on money would have taken another 3 months of saving and working – I chose the instant gratification.

Slack Investor is a great believer in the “tried and true” problem solving method of

Research – Weigh up the pros and cons …
Make a decision
Move On … No Regrets – you have made the decision with the available facts.

However, the pulling out of my super when I was in my twenties is one of the few things that brings me just a tinge of regret.

The Hesta Retirement Balance Projection Calculator shows that my $3500 would have grown to nearly $31000 at my 62-year old retirement date (Assumptions: at 8% growth and 2% inflation). Slack Investor likes this calculator as it allows you to set assumptions that help account for inflation as well as growth.

Perhaps if I had just delayed my trip by a few months and worked a bit longer, I might have been able to retire just a little bit earlier. Ah well … we make our decisions and … such is life.

Be safe, be kind … and make an informed decision about releasing your super early.

Is Market Timing Just Too Hard?

Slack Investor has not too many attributes … but one of his few features is self-awareness and the constant need to review techniques on the way to financial independence.

I have been trying to run a timing strategy with my index funds since 2004. With some success, but I would only give a “try harder” sticker to the results.

The average yearly gain for the Slack Monthly “market timing” method over the alternate strategy of “buy and hold” (leaving funds in the ASX Index, UK Index, and the US Index), is respectively is 2.7%, 2.3% and 0.3% (At March 2020). Check out the charts, trades and the gains at the page links for each index.

Although these figures show outperformance for the Slack “market timing” method. These gains might have been outweighed by share dividends if I had held the shares instead of trading out to cash. At the moment cash returns are very low (0.5 – 1.5%) and, at the current average ASX 200 yield of 5.2%, shares make a lot of sense – But being in stocks is not for the faint-hearted.

The bear market of March of 2020 — Chart showing the historical number of days to reach a Dow Jones market fall of 30% – From a Beth Kindig article in Forbes

2020 has been the financial equivalent of the “Battered Sav” with wild swings in the stock market – and the fastest fall in stock market prices in history. The ASX fell 20.5% in 14 days to enter “Bear Market” territory on March 11. It was down 30% from its peak by March 16. It is the speed of the market falls that is making Slack Investor starting to question his monthly timing strategy. For the US Dow Jones index, the rapid fall of 30% in just 18 days during March 2020 has set new records.

Things are getting freaky!

A visualization of the daily moves for the US Market 2010-2019 shows that usually most daily movements are less than 1% either way – This is Slack Investors comfort zone. But, occasionally, the market moves much more in a day. I think these large moves are getting much more common with the increased prominence of high frequency trading.

A great visualization from 2019 showing the daily percentage movements of the US stock market since 2009. **Most** of the daily moves are between -1% band +1% – but higher fluctuations do occur. – from www.chartr.co

Compare the size of daily movements on the US market in January 2020 with March 2020 – where most days had changes more than 3%.

A comparison of daily percentage change on the US Dow Jones Index in January 2020 with March 2020. From Bloomberg ofdollarsand data.com

Large share brokers and investment firms use trading systems that automatically buy into rising markets and sell into falling markets. These trades are executed by computers that use a defined set of instructions known as an algorithm to place a trade. If the market is moving up or down then these trading systems inflate the movements of the market as they try to get in or out of a trade. These computer trades make it hard for individual investors as their trades happen in microseconds. Algorithmic trading is growing rapidly at 11% per year.

“fundamental discretionary traders” accounted for only 10 percent of stock trading volume
JP Morgan quote from 2017

That means that we individual traders are up against the machines for 9 out of every 10 trades.

“Investors may have to get used to big, sudden moves in the stock market due to fewer institutions pushing equities to attractive valuations while hedge funds reach unprecedented levels of employing computerized momentum-based strategies. The result will be “faster and deeper” corrections.”
JP Morgan

I will keep my market-timing experiment for index funds (Less than 3% of my Portfolio) going for another 4 years (to make it a 20-year trial). My feeling is that by waiting till the end of the month, sometimes the market has corrected too far. However, for the bulk of my stocks, my message is to embrace the volatility of the stock market … it is what it is! The share market is still one of the most convenient way to build wealth for the investor.

Slack Investor cannot beat the computers in a momentum trade. But I do have some advantages over the the machines. I can try to judge what a business is worth. Does it have barriers to entry for other companies? Is it growing? Does it have too much debt? Find yourself some good growing companies with a track record of increasing earnings. Do a little “tweaking” to suit the times … and stay safe in these troubled times.